Income Tax Appellate Tribunal - Delhi
Bechtel India Pvt. Ltd., New Delhi vs Dcit, New Delhi on 20 August, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI 'I-2' BENCH,
NEW DELHI
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND
SHRI SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No. 6779/DEL/2015
[A.Y 2011-12]
Bechtel India Pvt. Ltd Vs. The Dy. C.I.T
418, Narang House, Circle 4(2)
21, K.G. Marg, New Delhi New Delhi
PAN : AAACB 0298 A
[Appellant] [Respondent]
Date of Hearing : 01.08.2018
Date of Pronouncement : 20.08.2018
Assessee by : Shri Himanshu Sinha, Adv
Shri Bhwan Dhoopar, Adv
Revenue by : Shri H.K. Choudhary, CIT- DR
ORDER
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order of the DRP -1, New Delhi dated 24.09.2015 framed u/s 144C(5) of the Income- tax Act, 1961 [hereinafter referred to as 'the Act' for short] pertaining to A.Y 2011-12.
2
2. This is the second round of litigation. In the first round, the matter travelled upto the Hon'ble High Court of Delhi. Following substantial question of law was admitted by the Hon'ble High Court:
"Whether the ITAT erred in ordering a de novo determination of the Arms Length Price by the Transfer Pricing Officer upon a fresh benchmarking?
3. The relevant findings of the Hon'ble High Court read as under:
"17. Consequently, the question framed by this Court is answered in the affirmative by holding that the ITAT ought not have remanded the matter to the TPO for the de novo determination of the ALP of the international transactions in the various segments. This exercise should be performed by the ITAT itself. This is on the basis of the submission of the Assessee that all the details relevant for such determination are already available on record.
18. The impugned order of the ITAT is accordingly set aside. The assessee's appeal ITA No. 6779/DEL/2015 for the concerned A.Y 2011-12 is restored to the file of the ITAT. The said appeal will be listed before it for directions on 21st August 2017".3
4. Pursuant to the order of the Hon'ble High Court, representatives of both the sides were heard at length. Having heard the rival contentions, we have carefully perused the orders of the authorities below and with the assistance of the representatives we have considered the documentary evidences and judicial decisions brought on record in the light of Rule 18(6) of the ITAT Rules, 1962.
5. Facts on record show that the assessee - Bechtel India Private Limited [BIPL] was set up as a subsidiary company in India by Bechtel, USA in April 1994 to render engineering support service in respect of engineering designs and drawings. BIPL executes engineering designs and drawings for various overseas Associated Enterprises [AEs] to support the overseas offices turnkey project execution. The assessee is also a captive service provider, providing:
(a) engineering design and related services [EDS] ;
(b) financial and accounting support [FAS]; &
(c) I.T. Infrastructure support services [IT Infra] to its AEs to support the overseas office's turnkey project execution.
6. International transactions undertaken by the assessee company with its AEs are summarised in the table below: 4
No. Nature of transaction Method
Value of
transaction
1 Provision of engineering design and related TNMM 1,31,40,40,147
2 services
Provision of financial and accounting support TNMM 5,05,29,404
3 Provision
services of IT infrastructure support TNMM 14,98,35,385
4 services /
Reimbursement of Expenses(paid) TNMM 5,07,26,046
2 Reimbursement of Expenses(received) CUP 10,78,45,266
7. Summary of economic analysis in the TP study can be understood from the table below:
Most Arm's length results
Amount
Appropriate
(In INR
Method and Margin of
crores) Appellant's Updated
Nature of Profit Level comparables
(Refer PLI margins
International Indicator in TP study1
page no. (Refer page (Refer page no.
Transaction ('PLI') (Refer page
372 of no. 321 of 13 of
(Refer page no. 321 of
paper paperbook) paperbook)
no. 321 of paperbook)
book)
paperbook)
Method:
Provision of
131.40 TNMM 10.84% 13.41%2 12.57%
EDS
PLI: OP/TC
Method:
Provision of
5.05 TNMM 10.52% 14.61%3 8.54%
FAS services
PLI: OP/TC
Provision of Method:
IT Infra 14.98 TNMM 14.32% 13.05% 7.38%
services PLI: OP/TC
Reimburseme
Method:
nt of
5.07 TNMM Not applicable
expenses
4 PLI: OP/TC
(paid)
1
2
3
4
5
8. During the course of TP assessment proceedings, the TPO did not agree with the comparables used by the assessee and rejected 7 comparables out of 11 comparables selected by the assessee on account of failing of filters or functional dissimilarities.
9. In the EDS, the following comparables were adopted by the TPO:
No Company Name OP/OC %
1 Acropetal Ltd (Eng. Design segment) 14.26
.2 Ashok Leyland Project Services Ltd. 24.7
O Bengal S R E 1 Infrastructure Devp. Ltd. 42.14
4 Cades Digitech Pvt. Ltd 5.78
J
5 Certification Engineers International Ltd. 78.45
6 Global Procurement Consultants Ltd. 30.86
7 Gujarat Industrial & Technical Consultancy Org Ltd. 7.89
8 1BI Chematur (Engineering & Consultancy) Ltd. 25.96
9 Indus Technical & Financial Consultants Ltd. 14.78
10 Kitco Limited 27.48
11 Mahindra Consulting Engineers Ltd. 30.92
12 Mitcon Consultancy &Engg. Services Ltd. 40.19
13 NTPC Electric Supply Company Ltd. 18.01
14 Pailavan Transport Consultancy Services Ltd. 25.59
15 R E C Power Distribution Co. Ltd. 39.44
16 Rites Ltd. 58.27
17 T C E Consulting Engineers Ltd. 29.29
18 Usha Hydro Dynamics Ltd. 29.45
Average 30.19
10. In the FAS, the following comparables were adopted by the TPO: 6
Not Company Name OP/TC %
1 Accentia Technologies Ltd. 29.18%
j.
2 Acropetal technologies Limited(Seg) 14.36%
3 e4e Healthcare Business Services Pvt. Ltd 9.77%
4 Eclerx Sendees Ltd. 56.82%
5 Infosys BPO Ltd. 17.86%
6 Jindal Intellicom Ltd. 13.70%
7 TCS E-Serve Ltd. 69.31%
8 Microgenetics Systems Ltd -3.20%
Average 25.98%
11. In the IT Infra, the following comparables were adopted by the TPO:
S. Company Name OP/ TC
1 Acropetal Technologies Ltd. (Information Technology 22.06%
No.
2 Akshay Software Technologies Ltd. (%)*
0.86%
3 services segment)
Celstream Technologies Private Ltd. 13.20%
4 e-Infochips India Private Ltd. 56.44%
5 Evoke Technologies Private Ltd. 8.11%
6 E-zest Solutions Ltd. 39.98%
7 Igate Global Solutions Ltd. 23.71%
8 Infosys Ltd. 43.39%
9 Larsen & Toubro Infotech Ltd. 18.40%
10 LGS Global Ltd. 14.11%
11 Mindtree Ltd. 10.29%
12 Persistent Systems & Solutions Ltd. 21.51%
13 Persistent Systems Ltd. 23.08%
14 R S Software (India) Ltd. 16.20%
15 Sankhya Infotech Ltd. (software development 26.20%
16 Sasken Communications Technologies Ltd. 24.33%
17 service
Tata segment)
Elxsi Ltd. 12.94%
18 Thirdware Solution Ltd. 18.30%
19 Wipro Technology Services Ltd. 54.42%
Mean 23.55%
7
12. Apart from the fresh search, the TPO redrew the appellant- company's segmental by :
(i) treating the reimbursement of expenses received as part of profit and loss account ;
(ii) reallocation of certain expenses which were not actuals based on the revenue of each segment; &
(iii) treating the provision/liabilities written back as non operative in nature.
13. Results of fresh segmental analysis resulted in the margins as under:
EDS - 8.98%
FAS - 21.57%
IT Infra - 18.06%
14. Further, the TPO did not allow the benefit of economic adjustments, i.e., working capital and risk, while computing the arms' length margins of the respective segments of the company. The TPO also made an adjustment on account of period of delay in receipt of payments from AEs. The TPO imputed an Indian based interest at the 8 rate of 10.84% p.a. for the period of delay in receipt of payments from AEs beyond 60 days.
15. Final adjustment made by the TPO can be understood from the following chart:
Tested Party's Arm's
Nature of margin as per length
S. Adjustment
international segmental margin
No. u/s 92CA
transaction redrawn by determined
the Ld. TPO by Ld. TPO
1 Provision of EDS 8.98% 30.19% 27,39,32,965
Provision of FAS
2 10.52% 25.98% 70,84,259
services
Provision of IT
3 14.32% 23.55% 1,21,12,787
Infra services
4 Receivables N.A. N.A. 33,16,088
Total 29,64,46,099
16. The appellant-company vehemently assailed the draft assessment order before the DRP. The DRP, after considering the facts and detailed submissions of the assessee, directed the TPO to exclude the 9 following comparables from the final comparable set on account of functional dissimilarities:
(i) Ashok Leyland Project Services Ltd.
(ii) Bengal SREI Infrastructure Development Ltd.
(iii) NTPC Electric Supply Company Ltd.
(iv) Pallavan Transport Consultancy Services Ltd.
17. In the FAS and IT infra support services, the DRP accepted the approach and the comparable set considered by the TPO, though the working capital adjustment was allowed by the DRP, but the risk adjustment for computing the arm's length margin was denied. In so far as charging of interest is concerned, the DRP directed to use six month LIBOR plus 300 bonus points as the interest rate while computing the interest on inter-company receivables.
18. Pursuant to the directions of the DRP, the following comparables set have been adopted:
10
EDS segment S. WC adjusted Company Name No. OP/TC Acropetal Technologies Ltd (Engineering 1 14.26% Design Services) 2 Kitco Ltd 28.79% 3 T C E Consulting Engineers Ltd 28.97% 4 Cades Digitech Pvt Ltd. 2.83% 5 Certification Engineers International Ltd 71.97% 6 Global Procurement Consultants Limited 29.32% Gujarat Industrial & Technical Consultancy 7 8.67% Org Ltd IBI Chematur (Engineering & Consultancy) 8 26.87% Ltd 9 Indus Technical & Financial Consultants Ltd 10.63% 10 Mahindra Consultants Engineers Ltd 30.32% 11 Mitcon Consultancy & Engineer Services Ltd 43.58% 12 R E C Power Distribution Co. Ltd. 31.00% 13 Rites Ltd. 58.27% 14 Usha Hydro Dynamics Ltd 25.40% 15 Arvind Accel Ltd. 2.47% Mean 27.56% 11 FAS Service Segment Sl. Company Name WC adjusted 1 Accentia Technologies Ltd 27.27% 2 No. Acropetal Technologies Ltd (Engineering 14.36% OP/TC 3 e4e Healthcare Business Services Pvt Ltd 10.96% 4 Eclerx design Services Ltd service seg) 56.64% 5 Infosys B P O Ltd 17.37% 6 Jindal Intellicom Pvt. Ltd 14.96% 7 TCE E-serve Ltd 70.03% 8 Microgenetics Systems Ltd -2.85% Mean 26.09% I.T. Infra Services Segment Sl. COMPANY NAME WC adjusted No. OP/TC Acropetal Technologies Limited (Information 1 22.06% Technology services segment) 2 Akshay Software Technologies Limited 2.68% 3 Celstream Technologies Private Limited 14.35% 4 e-Infochips India Private Ltd 55.60% 5 Evoke Technologies Private Ltd 9.36% 6 E-zest Solutions Ltd. 37.03% 7 Igate Global Solutions Ltd 23.93% 8 Infosys Ltd 43.41% 9 Larsen & Toubro Infotech Ltd 19.50% 10 LGS Global Ltd 12.42% 11 Mindtree Ltd 10.29% 12 Persistent Systems & Solutions Ltd 22.24% 13 Persistent Systems Ltd 22.82% 12 14 R S Software (India) Ltd 17.16% Sankhya Infotech Limited (software development 15 26.20% service segment) 16 Sasken Communications Technologies Ltd 23.77% 17 Tata Elxsi Ltd 12.94% 18 Thirdware Solution Ltd 18.30% 19 Wipro Technology Services Ltd 54.36% Mean 23.60%
19. We will first take up EDS Segment.
SEGMENT I EDS SEGMENT
20. The ld. counsel for the assessee strongly submitted that the following comparables deserve to be excluded from the final comparables set:
(i) Kitco Ltd
(ii) TCE Consulting Engineering Ltd
(iii) Certification Engineering International Ltd
(iv) Global Procurement Consultants Limited
(v) IBI Chematur [Engineering & Consultancy Ltd]
(vi) Mitcon Consultancy & Engineering Services
(vii) REC Power Distribution Co. Ltd 13
(viii) RITES Limited
(ix) Usha Hydro Dynamics Ltd.
21. We will take up each comparable one by one.
(i) KITCO LIMITED
22. The profile of this company shows that it is a 100% Government owned undertaking rendering services primarily to Central/State Government undertaking and PSUs. Most of the clients or projects undertaken by this company are either for state government or government run institutions. Therefore, the majority revenue of this company comes from government /state or centre run projects and the company derives benefit out of its parental relation with the Government in getting contract and because of this, the profit margins of this company cannot be said to be indicative of a free market economy where the appellant company and others operate. For these reasons, this company was excluded by the Tribunal in assessee's own case in assessment year 2010-11 in ITA No. 1478/DEL/2015 wherein the Tribunal relied upon the findings of the coordinate bench in the case of ThyssenKrupp Industries India Private Limited ITA No. 6460/MUM/2012. 14
23. The relevant findings given in the case of ThyssenKrupp Industries India Private Limited and of the coordinate bench in assessee's own case read as under:
"We find it as undisputed that Engineers India Limited is a Government company. It has several segments which also include 'Turnkey project' page 700 of the paper book is a copy of annual report of Engineers India Limited on turnkey project. It can be seen that the revenue has arisen from completing paraxylene plant of IOCL and further that company is engaged in execution of other unit of IOCL's Panipat Naphtha cracker project. In our considered opinion' this case should not have been included in the list of final comparables for two reasons. First reason is that profit motive is not a relevant consideration in case of Government undertakings. Many Government Undertakings even operate on losses in furtherance of the social obligations of the government. The second reason is that Engineers India Limited earned income from turnkey project by successfully completing the project of IOCL and other Public Sector Undertakings. In that sense of the matter, the related party transactions are much more than the filter of 25%. We, therefore, order for the exclusion of this case from the list of comparables."
12.5 In the above ruling, the comparable M/s. Engineers India Limited was rejected primarily on the ground that it was working for 15 government/public sector undertakings and since the company also being a government owned enterprise; the transactions tantamount to related party transactions. The same is true for the said comparable as Kitco Ltd., transactions are primarily with government owned enterprises. Applying the preposition laid down in the case of M/s ThyssenKrupp Industries India Private Limited (supra), we hold that Kitco Ltd., cannot be accepted as a comparable company. Hence the same is directed to be eliminated."
24. Respectfully following the findings of the coordinate bench [supra], we direct to exclude KITCO from the final set of comparables.
(ii). TCE CONSULTING ENGINEERS LTD
25. Profile of this company shows that it is involved in activities beyond engineering design extending from concept to commissioning whereas the assessee provides services as a captive unit to its overseas AEs. This company was excluded from the set of comparables in assessee's own case in assessment year 2010-11 in ITA No. 1478/DEL/2015.
16
26. The relevant findings of the coordinate bench in assessee's own case [supra] read as under:
"The comparable company is involved in activities beyond engineering design. It is engaged in activities that extend from concept to commissioning. Whereas the assessee provides services as a captive unit to its overseas AEs. The diversified functions of this comparable company include pre-project activities, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision. Further, there is no segmental accounting in the annual report of the Company which provides profitability, for the engineering design segment. Hence the same cannot be accepted as a comparable."
27. Respectfully following the findings of the coordinate bench [supra], we direct to exclude TCE Consulting Engineers Ltd from the final set of comparables.
(iii). CERTIFICATION ENGINEERING INTERNATIONAL LTD
28. This company was also excluded by the Tribunal from the set of comparables in assessee's own case in assessment year 2009-10 in ITA No. 882/DEL/2014.
17
29. The relevant findings of the coordinate bench in assessee's own case [supra] read as under:
"32. On the basis of foregoing discussion, we have no hesitation to hold that the functions of assessee Bechtel India are quite dissimilar with CIEL which was wrongly taken by the TPO as a suitable comparable for benchmarking of impugned international transaction undertaken by the assessee during the relevant financial period. The functional dissimilarity as well as distinction in the geographical market in the light of foreign exchange fluctuation risk of the assessee company coupled with below 25% RPT undertaken by the CIEL, we, therefore, decline to agree with the conclusion of the AO/DRP/TPO that the CIEL is a suitable comparable for the purpose of proposed TP adjustment made by the authorities below. Functional dissimilarity and other aspects cannot be ignored and these factors clearly demonstrate that CIEL should not have been included in the final set of comparables for making transfer pricing adjustment pertaining to the impugned international transactions of the assessee company and we order to exclude the same from the final set of comparables. It is ordered accordingly."
30. Respectfully following the findings of the coordinate bench [supra], we direct to exclude Certification Engineering International Ltd from the final set of comparables.
18
(iv) GLOBAL PROCUREMENT CONSULTANTS LTD. [GPCL]
31. The profile of this company shows that GPCL has been promoted by the Export-Import Bank of India as a private sector company in partnership with leading corporate groups like RPG Industries, MECON, Tata Consulting Engineers, Consulting Engineering R. L. Dalai & Co., Agricultural Finance Corporation, RITES, WAPCOS, Kirloskar Consultants and Ion Exchange. GPCL acts as the client's representative in taking on the total responsibility of procurement related advisory services and inter-allied activities for projects in India and abroad. With thorough knowledge of the guidelines and practices stipulated by international funding agencies like the World Bank, African Development Bank and the Asian Development Bank, GPCL is capable of providing to the project authorities, apt and appropriate advice and service in procurement, strictly following the procedures and policies of multilateral funding agencies and authorities. The company is registered with the World Bank, African Development Bank and other financial institutions. The procurement phase is the "key activity" in project cycle. GPCL monitors all procurement activities including project management from concept to commissioning, so as to ensure timely supply and delivery, quality control, thorough inspection, effective cost control and adherence to re schedules. Our expertise 19 will benefit the clients in getting an unbiased cost effective and exclusive professional service, which is also environment friendly financial institutions and project authorities who are particular on judicious utilization of funds prefer independent procurement consultants like GPCL. GPCL's consultancy services encompass:
• Preparing and reviewing technical specifications.
• Estimation of costs. • Selection of vendors. • Inspection and expediting. • Quality control and time management.
All contractual aspects involved in procurement will also be handled by the company, to ensure that the client's interests are protected. In addition to core expertise, with technical back-up drawn from the shareholding partners, who have specialization in different fields, GPCL will provide, services that are time bound, cost effective ap optimal for the clients leveraging upon knowledge of suppliers and vendors through a vast database, drawing upon its familiarity with international trade and its access to infotech.20
32. A perusal of the aforementioned profile of the GPCL shows that the company undertook valuation, consultancy and financial advisory assignments which are not all linked with the services provided by the appellant company to its AEs. The profile of a procurement company cannot be compared with the profile of engineering designed and related company [appellant company]. Considering the financial profile of this company, in our considered view, it is functionally dissimilar and, therefore, it cannot be accepted as a good comparable. We, accordingly, direct the TPO/Assessing Officer to exclude GPCL from the final set of comparables.
(v). IBI CHEMATURU [ENGINEERING AND CONSULTANCY] LTD.
33. This company was excluded by the Tribunal from the set of comparables in assessee's own case in assessment year 201011 in ITA No. 1478/DEL/2014.
29. The relevant findings of the coordinate bench in assessee's own case [supra] read as under:
21
"12.7 The comparable Company is involved in activities beyond engineering design which assessee provides. Apart from detailed engineering, the comparable company, also provides project planning, management services, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision etc. Further, there is no segmental accounting available in the annual report of the Company which provides profitability for the engineering design segment. The comparable company undertakes substantial R&D activities (R&D expense 5.41% of turnover) which is not a function performed by the assessee. Hence this company cannot be accepted as a comparable."
30 Respectfully following the findings of the coordinate bench [supra], we direct to exclude IBI Chematur [Engineering and Consultancy] Ltd. from the final set of comparables.
(vi) MITCON CONSULTANCY AND ENGINEERING SERVICES
31. The profile of this company suggests that it provides technical consultancy in various areas such as power division, energy and carbon service division, banking and finance division. This company also renders vocational trainings, IT trainings and laboratory services from 22 which it earns 40% (approx.) of its revenue. From a screen shot of its profile, which is also at page 113 of appeal set, shows that the Ministry of Environment and Forest, Government of India extended its accreditation to the laboratory of this company. It is further seen that this company has also exclusively completed QCI-NABET accreditation process mandatory for EIA consultants. The company has also executed environment monitoring assignments for TACO group, Volkswagon, Kirloskar Brothers. This company is also engaged in the banking and finance, entrepreneurship and vocational training. In our considered opinion, the functional profile of this company is not at all comparable with the function performed by the appellant company. Therefore, this company cannot be a good comparable. We, accordingly, direct for exclusion of Mitcon Consultancy and Engineering Services from the final set of comparables.
(vi). REC POWER DISTRIBUTION COMPANY LIMITED.
32. This company is a wholly owned subsidiary of REC Ltd which is a Navratna PSU and is engaged in the rural electrification projects. Being a Government company, it cannot be considered a good comparable in the case of the appellant company in the light of the 23 findings given by the co-ordinate bench in the case of Thyssenkrupp Industries [supra]. We, accordingly, direct the TPO/Assessing Officer for exclusion of REC Power Distribution Co, Ltd form the final set of comparables.
(viii). RITES LIMITED
33. This company was excluded by the Tribunal from the final set of comparables in assessee's own case in assessment year 2004-05 and 2005-06 in ITA No. 1476 & 1477/DEL/2015.
34. The relevant findings of the coordinate bench in assessee's own case [supra] read as under:
"19. RITES Ltd., taken as comparable by DRP/TPO: The taxpayer filed detailed objections to the different orders against inclusion of aforesaid company as comparable. The crux of the same is lying at pages 73-75 of the appeal set. Major objection raised by the taxpayer is that the comparable company is engaged in providing services in the areas of engineering consultancy, traffic studies, exports of locomotives and maintenance of the locomotives, construction and project management for railway 24 track, electrification together with traffic and software consultancy assignments. More so, its income from non consultancy services is less than 75% and this filter is applied by the TPO himself. 20. On other hand, the appellant company is engaged in engineering design and drawing for various overseas AEs to support overseas offices on turnkey project execution basis. Similarly, the cost of export sales and supply services constitutes merely 35.86% of the total cost. So keeping in view the fact that comparable company i.e. RITES Ltd. taken by TPO is functionally distinctive having been engaged in the area of engineering consultancy, traffic studies, export of locomotives and maintenance of the locomotives, construction and project management for railway track, electrification together with traffic and software consultancy assignments as against, the appellant company which is engaged in engineering design and drawing for various overseas AEs to support overseas offices on turnkey project execution basis. 21. The appellant also sought exclusion of Engineers India Ltd., a Government company form the list of comparables on the ground that profit motive is not relevant consideration in case of Government undertakings by relying on the judgements cited as M/s. Thyssen Krup Industries India Pvt. 10 ITA No.1476/Del/2015 Ltd. in I.T.A. No. 6460/Mum/2012 New Delhi M/s. Avaya India Private Ltd. in I.T.A. No. 5150/Del/2010 (supra) and contended that the Government companies cannot be taken as comparables for TP by following the law laid down by Hon'ble Jurisdictional High Court in M/s. Avaya India Pvt. Ltd. and M/s. Thyssen Krupp Industries India Pvt. Ltd. (supra). The Government undertakings 25 can even operate on losses in furtherance of social objectives of the Government. By relying on the judgement supra as well as on functional disparity between aforesaid comparable company and the appellant company, this company is ordered to be excluded from the list of comparables."
35. Respectfully following the findings of the coordinate bench [supra], we direct the TPO/Assessing Officer for exclusion of RITES Ltd. from the final set of comparables.
(ix). USHA HYDRO DYNAMICS LTD
36. Profile of this company reveals that it is engaged in the business of cleaning of various machines and equipment for various industries and is also doing trading business whereas the business of the appellant company is engineering design and related services. Two services are highly different and cannot be said to be comparable to each other. More than 90% of its income is from cleaning process. Being a functionally different company, it deserves to be excluded from the final set of comparables. We order accordingly. 26
37. Having excluded the aforesaid companies from the final set of comparables, we find that the assessee has pleaded for inclusion of the following companies in the final set of comparables which have been rejected by the DRP-I.
(i) UB Engineering Ltd
(ii) Accuspeed Engineering Services India Ltd We will take up one by one.
(i) UB ENGINEERING LTD
38. The profile of this company suggests that it is engaged in the operations comprising of infrastructure and industrial projects which are directly related to sectors like power generation and distribution, oil and gas, petroleum, steel, cement fertilisers, etc. The company is also engaged in the business of providing integrated design engineering, procurement, construction and project management services for infrastructure and energy sector in terms of construction contract. The company operates in two primary business segments i.e. mechanical erection/engineering procurement and construction [EPC] and EPC Electrical. From the profile of this company, it can be seen that the functions performed during the year are totally different from the functional profile of the appellant company. The DRP may have 27 included this company as comparable in earlier assessment years, but the profile suggests that it cannot be included as a good comparable. Therefore, we do not find any error or infirmity in exclusion of this company and it will remain excluded from the final set of comparables.
(ii) ACCUSPEED ENGINEERING SERVICES INDIA LTD
39. We find that in assessment year 2010-11 also, this company was excluded by the TPO but the Tribunal in ITA No. 1478/DEL/2015 included this company in the final set of comparables. The finding of the Tribunal reads as under:
"12.8 The ld. TPO in his order, has rejected the said comparable based on its functional profile, holding that the comparable company is involved in software services. The Ld.AR submitted that this comparable company is not into software services, instead, is engaged in providing consultancy activities in Engineering solutions and services covering design, detailed engineering, project construction & management. The ld.AR submitted that this comparable company provides engineering design solutions, and other related services, which is functionally similar to that of the assessee. We observe that the DRP has not given any reasons for rejecting this comparable. On examination of the papers on record, we are in agreement with 28 the submissions of the ld. AR. Hence we direct the A.O to include this company as a comparable."
40. Respectfully following the findings of the coordinate bench [supra], we direct the TPO/Assessing Officer for inclusion of Accuspeed Engineering Services India Limited in the final set of comparables.
SEGMENT II FINANCIAL ACCOUNTING SUPPORT SERVICES SEGMENT
41. The assessee as a captive service provider is engaged in the provision of services related to accounts payable management, payroll processing, invoice processing and handling of related queries to its AEs.
42. The functions performed by the assessee are broadly outlined as under:
"Invoice processing: Under this process, scanned invoices raised on Bechtel Group Companies are provided to BIPL. The financial and accounting support services team at BIPL is responsible for uploading the information presented in the scanned invoices on the in-house database of the Bechtel Group. This team also 29 provides support in processing employee payroll processing and reimbursements for the BIPL employees.
Help desk support: Under this function, BIPL provides query management and troubleshooting support to the Group Companies with respect to their supplier management functions.
Account Closing and Management Reporting: The function supports general ledger accounts management, analysis and closure, reporting, bank reconciliations, inter-office reconciliations and billing and collection processes.
Tax advisory services: This function involves providing advice to the Group entities with respect to effective and efficient tax management.
Management of funds: Under this function, BIPL advises Bechtel group entities on potential investment opportunities. It also monitors the performance of investments with a view to protect the assets of BIPL as well as the group entities. The ultimate decision making authority with respect to investments lies with the group entities. It is also responsible for managing the finance, insurance and treasury functions for some of the Bechtel group entities."30
43. An understanding of the assets employed and owned by BIPL will provides and insight to the resources it deploys and their contribution to the company's business processes/economic activities. BIPL utilises its office premises, computers, communication facilities, other office equipment, etc for the purpose of its business. BIPL does not own any significant intangibles. The services provided by BIPL to its group entities have not given rise to any significant intangibles. The risk assumed can be understood from the following chart:
Exposure to BIPL Exposure to AEs
Risk Category and Description
BIPL does not have any direct All market risks with respect to
exposure to this risk because the services including customer
it is a back office support acceptance are borne by overseas
Market Risk: Market risk arises service provider for overseas group companies.
for a business due to increased group companies.
competition and relative pricing pressures, change in demand patterns and needs of customers, inability to develop / penetrate in a market, etc. Service liability risk: Risks BIPL renders services to the Overseas group companies enter associated with service failures Group Companies. Thus, BIPL into contracts with end including non-performance to is not responsible to the end customers and hence bear all the generally accepted or regulatory customers of the Group, and risk associated with service standards. This could result in thereby does not have any quality.
service recalls and possible exposure to this risk. injuries to end- users.
Research & Development BIPL does not undertake any The Group is engaged in R&D for ('R&D') risk: Represents risk R&D activities in relation to developing new processes/ that R&D activities performed by the services provided to its methodologies, tools, etc for its an enterprise may not be AEs. Hence, it does not bear operations. Accordingly, it is successful. any risk in this respect. exposed to this risk. 31 Credit Risk: This is the risk arising The AEs bear this risk in relation from non-payment of dues by to the possibility of non-payment BIPL does not bear this risk as from the end client. customers.
it provides services to its AE only. Its remuneration does not depend on recovery carried out by the AEs.
Foreign Exchange Risk:
This risk relates to the potential impact on profits that may arise BIPL receives its remuneration because of changes in foreign in foreign currency. exchange rates. Accordingly, it bears the risk The Group has business dealings of foreign exchange with a number of customers and fluctuations depending on the subsidiary companies in their local movement of the foreign currencies and hence, to that currency vis-a-vis the Indian extent, it also bears foreign rupee. exchange risk.
Manpower Risk: Any enterprise which is largely dependent, for its success, upon quality personnel with The AEs do not bear any superior technical knowledge is manpower risks for the Indian faced with this risk. Competitive operations. They however bear market forces expose such an The manpower risk for the manpower risk in relation to enterprise to the risk of losing India operations is completely manpower employed and its trained personnel. borne by BIPL. maintained by them.
Legal and Statutory Risk: BIPL bears risk on this account This risk primarily arises on non- since it is responsible for compliance with any ensuring compliance with legal/contractual/statutory local legal and statutory The AEs do not bear this risk for provisions requirements. the Indian operations.
Capacity Utilisation risk:
This risk arises on account of under-utilisation of In respect of the India manufacturing/service BIPL has limited exposure to operations, the Group is exposed facility/personnel this risk. to this risk.
Price Risk: This risk arises as a result of price pressures in the BIPL has exposure towards market resulting in price this risk, since the price undercutting, and thereby pressures in the industry The AEs operate in the open adversely impacting would affect the market and hence are exposed to profitability. compensation for its services. this risk.
44. However, when the matter was agitated before the DRP, the DRP observed that "considering the facts and description of services given, it is clear that the assessee is a high- end KPO in this segment". In our considered opinion, considering the services provided by the assessee 32 in this segment, it would be erroneous to conclude that the assessee is a high-end KPO in this segment. Moreover, the FAR analysis given by the appellant was accepted by the TPO in his order.
45. Comparables finally selected by the TPO and confirmed by the DRP are as under:
No. Company Name OP/TC %
1 Accentia Technologies Ltd. 29.18%
2 Acropetal technologies Limited(Seg) 14.36%
3 e4e Healthcare Business Services Pvt. Ltd 9.77%
4 Eclerx Services Ltd. 56.82%
5 Infosys B P 0 Ltd. 17.86%
6 Jindal Intellieom Ltd. 13.70%
7 T C S E-Serve Ltd. 69.31%
8 Microgenetics Systems Ltd . -3.20%
Average 25.98%
46. The counsel has strongly objected to the inclusion of the following comparables as they are functionally dissimilar comparables:
a) Accentia Technologies Ltd
b) Eclerx
Accentia Services Limited
Technologies Limited
c) T C S E-serve Limited
47. We will consider the objections raised by the ld. AR one by one. 33
I. Accentia Technologies Limited [ATL]
48. The business profile of this company shows that the promoters of Accentia had initially ventured into ITES business through GeosoftTechnologies (Trivandrum) Ltd. In the year 2006, the promoters took over a Mumbai listed company named Company named HiTech Entertainment Limited and in the same year, HiTech Entertainment Limited took over Geosoft and Iridium and the name HiTech Entertainment was changed to AccentiaTechnologies Ltd. It would not be out of place to mention that Geosoft Technologies started Product Division under the name of Iridium. Products like Iridium Medical Transcription Automation Software (iMTAS), Iridium Certified Home Based Medical Transcription (iCHMT), Iridium Certified Medical Transcription (iCMT), Falcon-2000, FI HBPO automation Software, iridium Real Time School (iRTS), iridium Accounts Management System (iAMS), iridium Inventory Management System (ilMS), iridium Payroll Management System (iPMS), iridium BusinessTranscription System (iBT), iridium Hospital Management System (iHMS) are few of the products.
34
49. Thus, it can be seen that this company has significant amount of brand, IPR and goodwill. The appellant company on the other hand, is a simply captive service provider, which provides services related to accounts payable management, payrole, processing invoice processing and handling of related queries to its AEs. ATL is not a good comparable. As can be seen from the above, it is functionally dissimilar. Moreover, this company was rejected as a comparable in assessee's own case in assessment year 2010-11 in ITA No. 1478/DEL/2015.
50. The relevant findings of the co-ordinate bench read as under:
"This company has been included by the ld.TPO as a comparable. Functionally, Accentia Technologies Ltd., is into development of software products for healthcare. It is submitted by the ld.AR that 17 ITA No. 1478/Del/2015 Accentia Technologies Ltd is also engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DTO), high end software services. It is also submitted by the ld.AR that segmental information in respect of this company is not available. It has been further brought to our notice that this company has been rejected by the Ld.TPO in the earlier year. The company has also had business restructuring during the year under consideration thereby giving rise to extraordinary circumstances. For all these reasons we direct the Assessing Officer to exclude this company as a comparable."35
51. As the co-ordinate bench in the earlier year has rejected ATL as a good comparable, we do not find any reason why the same should be considered this year. We accordingly direct for exclusion of ATL from the final set of comparables.
(ii) Eclerx Services Limited [ESL]
52. Eclerx is a KPO engaged in providing data analytics, data solutions services etc. The Hon'ble high court of Delhi in the case of Rampgreen Solutions TS-387-HC-2015(DEL)-TP has held that it would be flawed to benchmark IT enabled service provider using knowledge process outsourcing companies. We find that the Tribunal Special Bench in the case of Maersk Global Centres (India) Private Limited ITA No. 7466/Mum/2012 has held that this company is rendering high- end services involving specialized knowledge and domain expertise and was incomparable to the assessee company engaged in providing low- end services to group customers.
53. As mentioned elsewhere, the DRP has erroneously considered the assessee as a KPO whereas the assessee, as pointed out hereinabove, is providing service to its AEs as captive service provider engaged in the 36 provisions of services related to accounts payable management, payroll, processing invoice processing and handling of related queries to its AEs. In our considered opinion, ESL is not a good comparable as it is functionally dissimilar from the assessee company. We, accordingly, direct for exclusion of ESL from the final set of comparables.
(III) TCS E-SERVE LIMITED [TCS]
54. The business profile of this company shows that it undertakes, customer service, transaction processes, collections, risk management, and analytics, and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fund transfers, etc. The company also undertakes software testing and validation activities. Needless to mention that this company is associated with TCS and TATA brand name. We find that in A.Y 2010- 11, this company was rejected as a good comparable by the Tribunal in assessee's own case in assessment year 2010-11 in ITA No. 1478/DEL/2015.
37
55. The relevant findings of the co-ordinate bench read as under:
"This company has been selected by the ld.TPO as a comparable. This company undertakes, customer service, transaction processes, collections, risk management, and analytics, and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fund transfers, etc. The company also undertakes software testing and validation activities. Possession of intellectual property rights has to be factored if such a company is to be taken as comparable. This cannot be done unless there is appropriate data. Further, from the TP study we observe that, this company is a wholly owned subsidiary of TCS E serve International Ltd. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. Hence we are of the opinion that this company cannot be taken as a comparable. We therefore direct to exclude this comparable."
56. Considering the functional dissimilarities in the light of the findings of the coordinate bench [supra], this company is not a good comparable. We, therefore, direct for exclusion of TCS from the final set of comparables.
38
SEGMENT III IT INFRASTRUCTURE SUPPORT SERVICES SEGMENT
57. The functions performed by BIPL under this segment are as under:
"Functions performed by BIPL BIPL has set up an offshore centre at Gurgaon. Presently, BIPL has a team of 600 people approximately who are engaged in providing-IT infrastructure support services. The centre is used to monitor and manage various IT infrastructure components such as servers, networks, storage equipment, messaging etc. The centre is integrated with the Group Companies centre to ensure seamless delivery operations between the two locations. The IT Infrastructure support services typically involve performing the following services:
• Data centre and systems management, • Infrastructure management, • Web hosting and internet access, • Desktop solutions, • Messaging services, • Program management, • Hardware and software maintenance and monitoring, • Network management, including VPN services, • Service desk capabilities, • Physical security, 39 • Network security, • Risk management, and • Regular administration.
For this function, the Group Companies specify the basic requirements and BIPL is responsible for undertaking the routine activities in line with the same.
The details of the services performed by BIPL with respect to IT infrastructure support services are given below:
• Monitoring Services: Remote monitoring and management of the Windows based servers and machines:
• Network Services: Remote monitoring and management of the various network components like routers, switches, firewalls;
• Messaging Services: Managing the mailboxes and user accounts including the messaging servers like. Lotus Notes, etc;
• Data Base Administration: Maintaining the various databases and carrying out administration activities; • Network Services: BIPL provides a variety of network services to help Group Companies share information more effectively. It enables the Group Companies to enjoy greater mobility and real-time data access, extend and leverage existing infrastructure and 40 enhance service delivery with the help of wireless services. It also provides technology expertise pertaining to new infrastructure implementation, an upgradation or expansion, or continuing support. • Service desk: Taking incoming voice calls from the Group Companies. The Group Companies can call up and log in their complaints for any problems at the help desk/service desk.
In addition to the above, it-is also involved in software development! enhancement of software. This involves routine development of the software for use-within the Bechtel Group. Software development involves steps like requirement analysis, testing, modification to the existing software and maintenance and enhancement of the software.'
58. The DRP has observed that the description of services given above makes it clear that the assessee is a KPO and is also engaged in software development. While deciding the issue under the segment financial accounting and support services, we have categorically held that the appellant company is not a high-end KPO service provider.
59. Final set of comparables under this segment are as under: 41
Sl. COMPANY NAME WC adjusted
No. OP/TC
1 Acropetal Technologies Limited (Information 22.06%
Technology services segment)
2 Akshay Software Technologies Limited 2.68%
3 Celstream Technologies Private Limited 14.35%
4 e-Infochips India Private Ltd 55.60%
5 Evoke Technologies Private Ltd 9.36%
6 E-zest Solutions Ltd. 37.03%
7 Igate Global Solutions Ltd 23.93%
8 Infosys Ltd 43.41%
9 Larsen & Toubro Infotech Ltd 19.50%
10 LGS Global Ltd 12.42%
11 Mindtree Ltd 10.29%
12 Persistent Systems & Solutions Ltd 22.24%
13 Persistent Systems Ltd 22.82%
14 R S Software (India) Ltd 17.16%
15 Sankhya Infotech Limited (software development 26.20%
service segment)
16 Sasken Communications Technologies Ltd 23.77%
17 Tata Elxsi Ltd 12.94%
42
18 Thirdware Solution Ltd 18.30%
19 Wipro Technology Services Ltd 54.36%
Mean 23.60%
60. Before us, the ld. AR vehemently argued for exclusion of the following comparables from the final set of comparables claiming that these comparables are functionally dissimilar:
(i) Infosys Limited
(ii) Wipro Technology Services Limited
(iii) Acropetal Technologies Limited
(iv) Sankya Infotech Limited
(v) Sasken Communication Technologies Limited
(vi) E-Infochips India Private Limited
(vii) E-Zest Solutions Limited
61. We will now consider these comparables one by one.
(i) INFOSYS LIMITED
62. At the very outset, INFOSYS cannot be considered as a good comparable in the case of the appellant company because its turnover 43 is over 1600 times more than that of the appellant's. Brand profits and owns significant intangibles. Moreover, it has significant expenditure on research & development for developing new products and innovative technology. It also incurs Significant advertisement and marketing expenditures resulting in non-routine marketing intangibles. It owns branded / proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect, thereby making it diversified product portfolio product company. This company has been rejected as a comparable in a series of judgments of the coordinate benches. In our considered opinion, INFOSYS Ltd does not make a good comparable and deserves to be excluded from the final set of comparables. We order accordingly.
(II) WIPRO TECHNOLOGY SERVICES LTD [WTSL]
63. Wipro Technology Services Limited ('the Company') was incorporated on 15 September 2004 as a subsidiary of Citicorp Banking Corporation. Pursuant to the share purchase agreement dated 21 January 2009, all the shares of the Company was purchased by Wipro Limited, which is the holding company of WTSL. The activities comprise software related support services, primarily information technology software solutions/maintenance and technology 44 infrastructure support services. The company is currently engaged in providing software related support services, primarily information technology, software solutions/maintenance and technology infrastructure support services to Citigroup entities globally which is considered as one segment. Hence there are no separate reportable segments as required by Accounting Standard 17 on 'Segment Reporting'. The transaction between WTS and Citi Group companies falls within the ambit of section 92B of the Act. Therefore, its earning is with a deemed AE and has related party transactions of 100% of sales. On the given facts of this case, it does not pass the RPT/sales filter of 25% applied by the TPO. This company was rejected as a comparable by the co-ordinate bench in the case of Saxo India Pvt. Ltd ITA No. 6148/DEL/2015.
64. The relevant findings of the co-ordinate bench read as under:
"Adverting to the facts of the instant case, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee's AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., 45 there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables."
65. Considering the functional profile of WTS in the light of observations made by the co-ordinate bench [supra], we direct for removal of this company from the final set of comparables.
(iii) Acropetal Technologies Limited [ATL]
66. The TPO has applied an Employee Cost Filter, whereby the companies having employee cost less than 25% of their total cost have been excluded. The employee cost incurred by Acropetal Technologies Limited can be understood from the following chart:
Particulars Amount
(in 1NR)
Selling and Marketing expenses
- Salaries 9,040,989
- Contribution to PF 564,552
- Staff welfare expenses 29,147
46
General administration expenses
- Salaries 11,996,581
- Contribution to PF 877,799
- Staff welfare expenses 128,000
Software Development expenses
- Salaries 135,160,463
- Contribution to PF 3,851,751
- Staff welfare expenses 1,395,789
Total Employee Cost 163,045,071
Total Operating Cost 1,065,696,7
Employee Cost ratio 29
15.30%
67. We find that the DRP has simply confirmed the findings of the TPO by making an observation that the assessee has not been able to controvert detailed findings of the TPO in support of his decision on the comparables selected. In the light of the above factual chart, we do not find any merit in the observation of the DRP considering the fact that Acropetal Technologies Limited fails the filter test and deserves to be deleted. We order accordingly.
(iv) Sankya Infotech Ltd
68. Profile of this company shows that it is engaged in the e learning activities and training solutions and is engaged in the development of simulation and virtual training products which are totally different 47 from the functions performed by the appellant company under the IT Infra Support Services Segment. On finding this dissimilarity in the functions, we do not find this company to be a good comparable. We direct for exclusion of Sankya Infotech Ltd from the final set of comparables.
(v) Sasken Communication Technologies Limited
69. Profile of this company shows that it is engaged in rendering testing, satellite communication and other different services and is also engaged production of software products. This company has spent around 4.20% of its sales on marketing and advertisement expenses. This company is significantly engaged in Research and Development as is evident from Exhibit 1256 & 1259 of the PB. Sasken was not considered as a good comparable IT Infra Support Services Segment by the coordinate benches in the following cases:
(i) Saxo India Private Limitged vs ACIT (ITA No. 6148/Del/2015)
(ii) ION Trading India Pvt. Ltd. v/s ITO (ITA No. 1035/Del/2015)
(iii) Tibco Software (India) P. Ltd. v/s DCIT (ITA No. 94/PN/2014)
(iv) Motorola Solutions India Pvt. Ltd. v/s ACIT (48 Taxmann.com 248 48
70. Considering the dissimilarities in the light of findings of the coordinate benches, we direct for exclusion of Sasken Communication Technologies Limited from the final set of comparables.
(vi) EINFOCHIPS INDIA PVT. LTD
71. Profile of this company shows that it is providing diversified services like application software; e-commerce; mobility; BI and visualisation; firmware and system software; board design; ASIC / SOC / FPGA Services; mechanical and industrial design. Segmental data is not available. Income statement of this company shows that the Revenue from soft ware development is around 74% of the total revenue and, therefore, fails to pass the service revenue filter. On this ground itself, this company deserves to be excluded from the final set of comparables.
(vii). E-ZEST SOLUTIONS LTD
72. Annual report of E-Zest Solutions Pvt which is exhibited at pages 1364 to 1442 of the paper books shows that it is engaged into diversified services like product engineering services / outsourced 49 product development services - Includes product designing and development product feature enhancement, product platform migration, software product testing, license management, Enterprise application development which includes customer relationship management, enterprise resource planning, business intelligence, knowledge management etc. IT service includes global onsite/ offshore software development, custom software development, software testing and Technology expertise - Includes technology competency centers in relation to Microsoft competency centre, Sun Java competency centre, Open Source competency centre, cloud computing practice, mobility practice and BI practice. Because of these highly diversified services, this company was not considered as a good comparable for IT Infra Support Services by various coordinate benches to name a few:
(i) 3DPLM Software Solutions Limited [IT (TP) A No. 1303/Bang/2012]
(ii) NXP Semi-conductors Pvt. Ltd. Vs. ACIT [IT(TP)A 1174/Bang/2011]
(iii) Hewlett- Packard (India) Software Operation P. Ltd vs. ACIT [TS-
446-ITAT-2015(Bang)TP]
(iv) Financial Objects Software (India) Pvt Ltd Vs ITO [TS-292-ITAT-
2015 (Bang)-TP] 50
(v) Mindteck (India) Ltd Vs ITO [TS-251-ITAT-2015 (Bang)-TP]
(vi) Symphony Services Pune (P) Ltd. v/s ITO ward 1(4), Pune [ITA No. 257(PN)/2013]
(vii) Mentor graphics India Pvt Ltd v DCIT [ITA no. 410/Del/2013)
73. Since this company is functionally dissimilar and has been rejected by the coordinate benches [supra] we direct for exclusion of this company from the final set of comparables.
74. In the light of specific directions in respect of the three segments as discussed hereinabove, we direct the AO /TPO to recomputed the PLI.
75. The next issue relates to economic adjustments on account of risk.
76. We find that the lower authorities have not provided economic adjustments on account of difference in risk profile of the appellant vis a vis comparable companies. We find that the assessee is a captive service provider which gets remunerated on cost plus model and hence insulated from key business risk, while the comparable companies 51 operate as entrepreneur and are subject to all the risks associated with conducting a business. We find that this claim was also accepted by the Tribunal in assessee's own case in A.Y 2004-05 and 2005-06 in ITA Nos. 1476 & 1477/DEL/2015.
77. Relevant findings of the coordinate bench in ITA No. 1476/DEL/2015 reads as under:
"23. Regarding ground No.2 read with ground No.1.6, Ld. A.R. has contended that TPO/DRP has erred in denying the adjustment of complete utilization as well as risk adjustment while working on average matching of comparables. Rule 10B(3) read with Rule 10B(1)(e) clarifies that appropriate adjustment should be made to eliminate material effect of difference between the international transaction and the comparable transaction to establish comparability. DRP in para 8.2.6 of the impugned order written its findings for denying the capital utilization adjustment as well as risk adjustment, which are as under:
"8.2.6 With regard to the issue of adjustment sought on account of risk and idle capacity utilization, having gone through the taxpayer's submission and considering the facts and evidences on records and case laws relied upon both by the TPO and taxpayer in this regard, this DRP agrees that for the purpose of meaningful comparison, Transfer Pricing 52 provisions do prescribe that the "reasonable and accurate adjustments" be made only for the enhance comparability. But at the same time such data must be reliable and robust and there should be no scope for mechanical adjustments. The Panel has carefully considered the facts of the case and the submissions of the taxpayer. As per Rule 10B(2) and 10B(3) of Income Tax Rules, 1962, Indian transfer pricing provisions prescribe only for "reasonable accurate adjustment" and further adjustment to the margins of comparables can be made only if they enhance comparability. But at the same time the data for the same must be relevant reliable and. robust. Risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such risk and how the same materially affected their margins. The revised OECD guidelines of.2010 has also stated. in para 3.54 as under:-
"Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed the reasons for the adjustments being considered appropriate how they were calculated how they changed the results for each comparable and how the adjustment improves 12 ITA No.1476/Del/2015 comparability. Issues regarding documentation of comparability adjustments are discussed in Chapter V."53
Even the various judicial decisions on the issue of adjustments and even OECD guidelines, impresses upon time and again that the adjustment should be "reasonable accurate adjustment".
From the above guidelines, it can be seen that unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustments, no adjustment can be allowed to the taxpayer. In the present case, except pointing out various risks, the taxpayer has not shown with evidence as to whether each of the risk was actually undertaken or not by the comparables and if so how these risks affected each of them and whether such adjustment would improve the comparability. Further in respect of comparables no data is 'made available to show at what capacity they are operating at and what is the average strength of the employees on account of which capacity adjustment should be carried out to improve the comparability analysis. Mechanical adjustment cannot be made to the margins of the comparables without knowing which risks were taken by the entity concerned and how its profitability was affected. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustments. The significant of risk depends on its economic significance, likelihood of its realization and "predictability. All" these requires robust and reliable 54 data, both for the taxpayer" and the comparables in the absence of which risk and capacity adjustments cannot be considered for enhancing comparability.
24. Bare perusal of the findings returned by TPO/DRP reproduced above denying the benefit of capital utilization adjustment and risk adjustment goes to prove that the objection raised by the tax payer having been mechanically disposed off without returning the specific findings as to how and under what circumstances, the data brought on record is not reliable or robust. TPO/DRP has neither declared the data brought on record by the taxpayer as 13 ITA No.1476/Del/2015 unreliable nor they have injected fresh data to assess the capital utilization adjustment and risk adjustment as claimed by the taxpayer. A perusal of the discussion made by DRP regarding disallowance of utilization adjustment and risk adjustment in para 8.2.6 further goes to prove that merely academic reasons have been given to disallow the same. Case law relied upon by the DRP is not applicable to the facts and circumstances of the case when examined in the light of data brought on record by the taxpayer to decide the issue in controversy. So, findings of DRP/TPO on this issue are liable to be reversed. Consequently, Ground No.2 read with Ground No.1.6 are determined in favour of the appellant for statistical purposes and the file is ordered to be restored to the TPO to decide the matter afresh by passing speaking order after providing opportunity of being heard to the parties."
55
78. Respectfully following the findings of the coordinate bench, we direct accordingly.
79. Last issue relates to adjustment on account of receivables.
80. This issue was decided in favour of the assessee and against the Revenue by the coordinate bench in the assessee's own case for A.Y 2010-11 in ITA No. 1478/DEL/2015 and order of the Tribunal was upheld by the Hon'ble High Court and Hon'ble Supreme Court in CA No. 4956 of 2017. In A.Y 2010-11, the coordinate bench ash given specific findings that the assessee is debt free company and it is not justifiable to presume that the borrowed funds have been utilised to pass on the facility to its AEs. Respectfully following the findings of the coordinate bench, we direct for deletion of adjustment on account of receivables.
81. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 20th August, 2018.
Sd/- Sd/-
[SUCHITRA KAMBLE] [N.K. BILLAIYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 20th August, 2018
56
VL/
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar,
ITAT, New Delhi
Date of dictation
Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr.PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order